Double bonus payments net N.B. pension fund executives record rewards

Investment managers and executives with the Fredericton-based firm that oversees New Brunswick government employee pension funds earned a record $8.6million in bonus pay in 2021 from two incentive programs that operated simultaneously, records show.

The bonuses earned by senior personnel of Vestcor were $3.3 million higher than the previous record amount paid in 2019 and $4.3 million higher than what was paid in 2020.

Much of the increase was generated by the operation of two bonus programsin 2021 that in many cases paid rewards to employees for the same achievements twice.

The size and growth of Vestcor's bonus program is one of the issues New Brunswick's Office of the Auditor General said in 2021 it would like to review with the organization.At the time,Vestcor disputed that it is subject to the auditor general's authority any longer, in what has become an ongoing issue between the two.

"Vestcor's accountability to government, the Legislative Assembly and the public remains a significant concern for our Office," declared a report issued by new Auditor General Paul Martin earlier this year.

"Two of our most significant areas of concern continue to be NB Power's ability to self-sustain its operations and the Auditor General's access to Vestcor."

Vestcor is headquarteredin Fredericton and was set up in the 1990s to manage what has become $21 billion in New Brunswick government employee pension and other funds.

It was originally a Crown agency but was reconfigured, renamed and given its independence in 2016.

It's now jointly owned by the province's two largest public pension plans serving New Brunswick civil servants and teachers, but it also oversees the retirement plans of hospital workers, nurses, Crown corporation employees, provincial court judges, MLAs and other groups.

Vestcor also manages other investment accounts, including University of New Brunswick endowment funds, retirement accounts for other organizations like the City of Fredericton and nuclear waste and decommissioning funds for NB Power.

Although Vestcor is not owned by government any longer, two New Brunswick auditor generals have argued "the significant amount of funds from public sources Vestcor manages"as well as its "extensive government-entity client base"makeits operations a public interest concern.

Auditors concerned

Vestcor has offeredincentive programs to employeesfor more than two decades.The organization argues bonus pay is standard in the investment industry, helps to recruit and retain quality employees and incentivizes good performance.

In Vestcor's case, bonus payments started out at modest levels but over the years grew significantly, an issue that eventually caught the attention of auditors.

"The Auditor General should have unrestricted access to audit the reasonableness of Vestcor's incentive program," former New Brunswick Auditor General Kim Adair-MacPherson wrote in her report on the matterin early 2021.

"Vestcor has paid over $30 million in employee incentives (bonuses) since 2010 and incentives have increased by almost 500 per centsince 2010. Five senior executives have received almost $19 million in incentives and salary since 2014."

In its latest annual report released last week, Vestcor disclosed there had been an internal overhaul of "incentive pay" at the organization that took effect on Jan.1,2021 just before Adair-MacPherson's report thatfurther boosted bonuses from amounts she was already concerned about.

Vestcor created a new simplified bonus pay structure to replace the previous system and added both enhancements and restrictions.

One new rule requires bonus amounts earned by employees to be paid out over four years, including 50 per cent in the first year and equal amounts in subsequent years with interest accumulating on amounts not immediately paid out.

Promises were also made to employees that the new bonus plan would be as generous as the one it replaced and would produce "outcomes similar to those under the prior program."

Despite that, there was also a decision not to completely end the prior bonus program when the new one took effect. Instead,Vestcor's board of directors voted to keep the most lucrative part of the original bonus system operating alongside the new system for 2021, 2022 and 2023.

"Employees will continue to be eligible to receive annual payments determined under the previously existing plan," explained Vestcor in its annual report about the decision to run two bonus systems simultaneously.

"These remaining applicable payments will continue to be subject to Board of Director approval."

Double bonus payments

The result was double bonus payments and record earnings for a select group of Vestcor employees in 2021, including the organization's four most senior executives.

John Sinclair, Vestcor's longtime president and chief executive officer, who received $882,721 in bonus pay in 2019 and $681,412 in 2020 under the old incentive plan, received$1,278,750 in 2021.

About two-thirds of Sinclair's bonus pay, $828,750, was generated by the new bonus system but $450,000 came from the old bonus program that was allowed to operate alongsideit.

That pushed Sinclair's total earnings for the year, including his base salary ($375,053) and contributions Vestcor made to his pension account ($115,386) to $1.77 million.

Three other senior executives who had shared just under $1 million in bonus pay in 2020, shared $2.16 million in 2021. Most of that increase came from $766,300 generated from the still active older bonus program that was allowed to run alongside the new program.

Sinclair emailed response

In an email, Sinclair noted an external consultant hired by Vestcor approved the concept of the two bonus programs running at the same time until the "deferral process" of the new bonus plan fully unfolds.

Also, Sinclair said the portion of the old bonus program that is still runningwas designed to pay amounts based on four-year results and sohas a natural lag time built into it.

"The long-term four-year focus, and implied waiting period to receive the applicable payout, provided a strong alignment with long-term client objectives while also providing a strong long-term employee retention motivation," wrote Sinclair."The wind down completes the previously initiated four-year cycles."

However, according to Vestcor's annual report, the two bonus programs overlap in significant ways and operating them at the same time has resulted in employees being rewarded twice for the same achievement.

Both, for example, reward employees when investment returns hit levels above targeted amounts over four-year periods.

In 2021, Vestcor reported its funds earned combined returns over four years of 7.5 per cent, 0.98 per cent above the target amount.That triggered substantial rewards forVestcor employees from both bonus pools.

On that point, Sinclair suggested that is natural given both the "legacy" bonus scheme and new one were designed to reward the same long-term results, "resulting in a strong focus on the importance of four-year client returns."